Pricing Strategies to Improve Cash Flow

It’s all very well having a winning product or service to sell, but without the right pricing strategies in place, you could still lose out.

Pricing strategy is hugely important in business – it has the potential to make or break you. Before fixing a price to anything, you should be fully aware of what your break-even price is. To be profitable, your pricing should be clearly above this level per unit for goods or per hour for services. That gives you a benchmark with which to formulate your pricing strategy.

From there, you can develop pricing strategies that align with your operations.

Value

Value pricing essentially puts the onus on customers to determine the price they are willing to pay. Yet this price isn’t necessarily restricted solely to the actual item they are buying – this is the overall perception of value based on cost, convenience, quality and so forth. In other words, value encompasses the total buying experience.

Many companies in the luxury-goods sector employ this pricing strategy – propagating the idea among consumers that a product must be a luxury item because of its high price, and therefore is more desirable.

Improving the perceived value of your product without increasing costs is a useful tool to justify higher prices to aid your revenue inflows. This could include adding extended warranties, support contracts or free delivery.

Cost

Cost-plus pricing is just as it sounds – simply calculating your costs and then adding on your profit margin, delivering you a price at which to sell your goods or services.

This is one of the simplest pricing strategies for businesses with fixed costs in particular, ensuring there is continual cash being generated, assuming sales are being made and invoices received in full.

Product

Product-based pricing is often used by startups or new entrants to a market. Most business operators would be aware of the concept of launching a new offering at a special introductory price. As customer confidence and uptake of the product grows, the price can then be increased accordingly.

An alternative strategy is the use of a loss-leader headline product, aimed at stealing market share away from established market players. A business can then make profits from upselling other products or services to those incoming customers.

Relying on this particular pricing strategy requires a high degree of confidence in the product in order for it to be successful.

Competition

As Allianz Insurance notes, knowing what competitors are doing is just as important as your own business. And when it comes to the number of potential competitors: “The fewer competing service providers there are in a market (i.e. the less options customers have), the higher the price each is able to charge.”

While it is illegal to collude with competitors to fix prices in a market, monitoring competitor pricing will enable you to determine current rates in the marketplace and set your own price accordingly.

Basic products or services can be priced at a discount, while superior offerings could command a price premium.

Remember too that a pricing strategy is a continual work in progress. The prices you charge customers should be fluid and adapt to changes in consumer demand, the number and quality of competitors in your market, your input and operational costs, as well as the value of your overall service offering.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.